Tag Archives: income

SPHD: A Monthly Dividend ETF With A 3.5% Yield That Is Growing Stronger

Summary SPHD offers an excellent dividend yield of 3.5% with monthly payments. The ETF has a moderate expense ratio. The sector allocations look great and the volatility over the last few years has been lower than the domestic equity market. The PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a very solid ETF. Investors may quibble on whether the allocations are perfectly or merely good, but there is far more to like than to hold against the fund. As you’ll see in the article, I find the sector allocation to be a bigger selling point than the individual holdings. Expenses The expense ratio is a .30%. This is fairly mediocre for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 3.50%. For the investor that wants a very strong dividend yield to support them in retirement, this should certainly qualify. Investors can create a stronger yield by selecting individual companies, but they are creating a high yield portfolio that is exposed to substantial risk of dividend cuts when they allocate aggressively to companies that are yielding materially higher than this portfolio. There are two other things to like about the dividend here. One is that the dividend is paid out on a monthly basis which many investors appreciate because it is easier for them to plan around. The other is that the 3.5% dividend yield is based on trailing dividends rather than forward dividends and the dividends have been moving slightly higher over the last year. The dividend went from around 9 and a half cents per month to over 10 cents per month. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with medium weights is one area where I tend to feel conflicted. Investors won’t see the Verizon in the chart, but I rarely find ETFs that only hold one. When I checked the rest of the holdings I found Verizon was represented with 2.22% of the portfolio. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Since the allocations are less than 5% of the portfolio combined, I think the representation here is pretty reasonable. I also see Realty Income Corp (NYSE: O ) as an easy choice for investors looking for solid growth in income. The triple net lease REIT has an excellent history of raising dividends. They pay their dividends monthly and have raised the dividend 81 times already. They have done an incredible job of executing their investment strategy and it is simpler than it seems. The REIT enters into net lease operations where the tenant is paying most of the operating costs. Realty Income Corporation is acting as an alternative format of financing for their tenant. Their strategy is so successful that they have been acquiring over a billion dollars in real estate each of the last few years. They already acquired almost a billion dollars in real estate in 2015. Sectors Heavy allocation to utilities makes sense for an equity fund seeking lower total volatility levels. The utility companies have a tendency to be partially correlated to equity and partially correlated to bonds which creates a method for a pure equity ETF to reduce volatility by incorporating some exposure that is very similar to bonds. For investors with a diversified portfolio, that means this fund may not get as large of a benefit from being combined with treasuries and other long duration bonds as a total market portfolio would get. Regardless, with investors needing stronger yields in retirement and often going light on bonds in favor of equity, this would be a more rational allocation model than simply going with full market exposure. The allocation to financials provides the shareholders with exposure to REITs that would fall with utilities when rates go up, but it also gives them access to banks that would benefit from higher rates paid on excess reserves. The combination works fairly well to create a portfolio with lower volatility. The heavy allocations to consumer staples also makes sense in that context since consumer staples tend to be a solid sector for taking smaller losses during a recession. I was a little curious about their decision to put 10% into industrials, but when I looked at the individual holdings for the sector it made sense. While General Electric (NYSE: GE ) is seeing their share prices just getting back to where they before the crash, their still offer a sold 3% yield. Volatility Measured since October 2012, this fund has demonstrated annualized volatility of 10.9% compared to 12.6% for the S&P 500. The beta on the fund has been a mere .75. While the fund has not kept up with the S&P 500, it is a very attractive allocation strategy with the market at fairly high valuation levels. For the investor that would like to reduce their risk and is willing to accept a lower long term projected return, this fund fits the bill. If market prices had fallen by 40%, I would try to look at more aggressive allocations. When prices still seem high, I prefer using defensive allocations and this fund offers a great deal of them. Conclusion All around this looks like a solid fund. The only thing I can find not to be excited about is the expense ratio. Even there, the ratio isn’t terrible. It is simply higher than what I am used to paying as I favor the Vanguard and Schwab ETFs. If this fund got larger and dropped the expense ratio, it would be absolutely excellent. I think that might be a viable option for the fund’s sponsor as well since the strong yield and monthly payment with a low expense ratio would create enough demand to warrant significantly more shares of this ETF being created.

Is This The Worst Time For MLP ETF Investing?

The double whammy of the recent crash in crude oil price below $40 and the Fed’s hawkish stance on interest rate hike are causing mayhem in the master limited partnership (MLPs) business. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. However, U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Oil drilling companies have idled over half their rigs from last month. The latest data from Baker Hughes Inc. (NYSE: BHI ) revealed that rigs engaged in the exploration and production of oil and gas totaled 767 for the week ended November 13, 2015, a decline of 4 from the prior week’s count and the lowest level seen since April 2002. The nationwide rig count is still less than half the prior-year level of 1,928. Despite a marginal rise to 574 last week, the oil rig count continues to be on the low end of the five-year range and is significantly below the previous year’s level of 1,578. International Energy Agency (EIA) has also reduced U.S. production outlook for 2016 by 1% to 8.77 million barrels per day. Some might think that the oil price is hitting its bottom but in reality it might head further south. This is because EIA has indicated that the global supply glut could get even worse as global stockpiles have reached the record level of 3 billion barrels owing to abundant supply from the OPEC countries as well as Iraq and Russia. Secondly, a strengthening U.S. dollar supported by the possibility of an interest rate hike weakens the demand scenario for greenback-priced commodities such as crude. A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. Firstly, higher interest rates lower the appeal for high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. The adverse developments in the oil and gas sector and the threat of a looming interest rate hike are heavily weighing on MLP stocks and ETFs and indicate the worst may not be over yet. Below we highlight three MLP-based ETFs that have witnessed double-digit fall so far this year and may continue to experience a downspin in the near future as well. Alerian MLP ETF (NYSEARCA: AMLP ) This is the most popular MLP ETF with AUM of $7.3 billion. It tracks the Alerian MLP Infrastructure Index, measuring the performance of 25 energy infrastructure MLPs. The fund’s top three holdings include Enterprise Products Partners LP (NYSE: EPD ), Magellan Midstream Partners LP (NYSE: MMP ) and Energy Transfer Partners LP (NYSE: ETP ), together accounting for 25.4% of assets. The ETF trades in a solid volume of 7.1 million shares per day and is very expensive with 5.43% in expense ratio. It offers a robust dividend yield of 9.3% and has lost around 27% in the year-to-date timeframe (as of November 18, 2015). Credit Suisse X-Links Cushing MLP Infrastructure ETN (NYSEARCA: MLPN ) MLPN follows the Cushing 30 MLP Index, measuring the performance of 30 mid-stream stocks in North America. The note is well distributed with its top 10 holdings comprising around 35% of the assets. It has an AUM of $505 million and exchanges roughly 192,000 shares in hand per day. MLPN charges 85 bps in annual fees and has a dividend yield of 6.8%. The note tumbled nearly 34% so far this year. iPath S&P MLP ETN (NYSEARCA: IMLP ) IMLP tracks the S&P MLP Index measuring the performance of MLP stocks that are classified in the GICS Energy Sector and GICS Gas Utilities Industry. Enterprise Products Partners, Energy Transfer Equity LP (NYSE: ETE ) and Energy Transfer Partners are the top three holdings in the fund with a combined exposure of nearly 35%. The product has amassed around $413 million in assets and trades in a moderate volume of roughly 97,000 shares per day. It charges 80 bps in investor fees and offers a dividend yield of 7%. IMLP shed 31.6% in the year-to-date timeframe. Original post .

U.S. High-Yield Bonds See Worst Q3 Performance In 4 Years

Reportedly, U.S. high-yield bonds suffered their worst performance in four years in the third quarter. The Credit Suisse High Yield Bond Fund ETF slumped 12% from July 1-Sept. 30. The index is down 17.1% year to date. An article by Forbes points to a deluge of bearish commentaries about high yield, seconded by Wall Street strategists. Remember, positive indications of the U.S. Fed hiking rates dominated for most part of the third quarter; while finally the central bank decided against a rate hike in September. The worst performance in four years echoed the broader markets’ trend. The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively, giving their worst third-quarter performance since Sept. 2011. Just 17% of the mutual funds managed to finish in the green. This was a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds that ended in the positive territory in the first quarter. Coming to the high-yield mutual fund performance in the third quarter, these saw a dour sentiment prevailing. But for a handful of funds, the majority of high-yield mutual funds finished in the red. Gains were minute, as only one fund could post an above 3% return while all other gainers settled below 2%. The best gainer in the third quarter was The Fairholme Focused Income Fund (MUTF: FOCIX ), which added 3.8%. Catalyst High Income C (MUTF: HIICX ) was the biggest loser as it nosedived 20.5%. For most part of the third quarter, high-yield bond funds suffered outflows. In fact, in the last week of the third quarter, i.e. in the week ending Sept. 30, high-yield bond funds saw net outflows of $2.2 billion. As of Oct. 7, the year-to-date outflow for high yield bond funds was $5.2 billion. Of the 667 funds we studied, just 25 managed to finish in the green. However, these 25 funds had paltry gains with just one fund posting an above 3% return. For the other 24 funds, gains ranged from 0.01% to 1.6%. The average gain for these 26 funds was 0.5%. While one fund had a breakeven return, 640 funds ended in the red. The average loss for these 640 funds was 4.2%. Fed Rate Hike Dilemma The record low rate scenario makes dividend-paying funds attractive. Mutual funds paying high dividends assure a consistent stream of income opportunities; and thus are lucrative investment options in a low rate environment. However, there were indications that the Fed will hike rates in September and end a record-long low rate environment. In July, the FOMC’s two-day policy meeting gave no clear indication on the timing of the first rate hike. Nonetheless, the door for a September rate hike was kept open. However, in a testimony before Congress, Fed chair Janet Yellen said she expects the U.S. economy to strengthen and the central bank to hike interest rates “at some point this year.” In August, minutes of the FOMC meeting held on July 28 and 29 revealed that the majority of policymakers “judged that the conditions for policy firming were not yet achieved,” but noted that conditions were approaching that point. Federal Reserve Vice Chairman Stanley Fischer commented that a September rate hike was “pretty strong” before China devalued its currency. Finally in September, the FOMC cited a weak global growth scenario and low inflation rate as the main reasons for their decision to not hike rates in September. The Fed continues to wait for “further improvement in the labor market” and inflation to “rise to 2% in the medium term.” Separately, though the Fed raised its outlook for economic growth for this year, it trimmed projections for 2016 and 2017. However, Yellen later indicated that the lift-off option is very much on the table for later this year. She was also optimistic about the U.S. economy. Top 9 High-Yield Funds Fund Name Q3 Total Return Q3 % Rank vs. Obj YTD Total Return % Yield Expense Ratio Minimum Initial Investment ($) Load Great-West Bond Index (MUTF: MXBIX ) 1.6 1 1.36 1.77 0.5 0 N Guggenheim Total Return Bond A (MUTF: GIBAX ) 0.47 1 1.41 4.07 0.87 2500 Y American Century Core Plus A (MUTF: ACCQX ) 0.37 1 0.31 2.68 0.9 2500 Y Rydex Inverse High Yield Strategy A (MUTF: RYILX ) 0.2 2 -2.82 0 1.52 2500 Y Fidelity Strategic Advrs Core Inc (MUTF: FPCIX ) 0.18 2 0.35 2.96 0.07 0 N Aquila Three Peaks High Income Y (MUTF: ATPYX ) 0.15 2 2.54 3.56 0.94 0 N RidgeWorth Limited Duration I 0.04 3 0.12 0.16 0.34 0 N Sterling Capital Corporate Fund A (MUTF: SCCMX ) 0.04 3 0.6 2.6 0.85 1000 Y Guggenheim Limited Duration A (MUTF: GILDX ) 0.01 3 1.89 3.54 0.85 2500 Y Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. Q3 % Rank vs. Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst. As said, high-yield mutual funds could manage flimsy gains. In fact, beyond the tenth-placed Guggenheim Limited Duration A, which gained 0.01%, the other funds had negative returns. However, GILDX sports a decent yield of 3.5%. The other funds with a decent yield and in the best performers’ list are Guggenheim Total Return Bond A, American Century Core Plus A, Fidelity Strategic Advrs Core Inc. and Aquila Three Peaks High Income Y with yields of 4.07%, 2.68%, 2.96% and 3.56%, respectively. Here, GIBAX and FPCIX carry a Zacks Mutual Fund Rank #3 (Hold). The top performer Great-West Bond Index also carries a Hold rating. Separately, ATPYX sports a Zacks Mutual Fund Rank #1 (Strong Buy) while ACCQX holds a Zacks Mutual Fund Rank #2 (Buy). Original Post